the insurance company’s prior position, or positions (e.g., did it accept or deny coverage?),

how it expressed that position, or positions (e.g., did it accept coverage under a reservation of rights, or did it deny coverage based on a specific ground and reserve its right to assert other grounds for denying coverage?),

whether the policyholder has been prejudiced by the insurance company’s change in its coverage position or the stated basis for its position, and

whether a lawsuit has been filed.

In short, this is an area of insurance law that lacks uniformity across the country. In T-Mobile USA, Inc. v. Selective Insurance Company of America, the Ninth Circuit Court of Appeals may decide the limits of a liability insurance company’s right to change its coverage position, or more specifically, the bases for its coverage position, under Washington law.1 The Court of Appeals may also decide whether, under Washington law, the content of a Certificate of Insurance prepared by an insurance company’s authorized broker is binding on the company, even if the content of the certificate varies from the terms of the underlying policy. That is another area of law that varies somewhat across the country.

In the underlying case,2 the facts of which are relatively complex, T-Mobile USA (“T-Mobile”) was named in a lawsuit in New York. That lawsuit arose out of damage allegedly caused by a cell phone tower owned or constructed by one of T-Mobile’s subsidiaries (which also included T-Mobile as part of its name). T-Mobile attempted to tender the defense of that lawsuit to Selective Insurance Company (“Selective”) under a policy that Selective had issued to one of the subsidiary’s contractors. According to T-Mobile, Selective initially denied coverage for T-Mobile based on an exclusion in the policy, but T-Mobile did not learn of Selective’s initial basis for denying coverage until more than two years after T-Mobile had sent its tender letter to Selective. Six months after T-Mobile learned of the basis for Selective’s initial denial of coverage, Selective denied coverage for a different reason, namely, there was no coverage for T-Mobile under the policy and T-Mobile’s tender of the claim was deficient because it did not identify its subsidiary as tendering the claim.3

Because Selective’s policy was subject to Washington law, T-Mobile filed a lawsuit in Washington seeking an order that Selective was contractually obligated to defend and indemnify T-Mobile in the New York case. T-Mobile contended that Selective’s authorized broker provided T-Mobile an insurance certificate that identified T-Mobile as an additional insured under Selective’s policy. According to T-Mobile, the terms of the certificate should be binding on Selective. T-Mobile also argued that, under Washington law, Selective should be estopped, or barred, from asserting that its tender of the claim was deficient because had Selective promptly raised that issue when T-Mobile initially sent its tender letter, T-Mobile could have corrected its tender by naming its subsidiary.4

According to T-Mobile, Selective’s denial of coverage based on the exclusion in the policy lacks merit, and because Selective should be barred from raising its defective tender defense, there is no basis for Selective to refuse to provide coverage for T-Mobile under the policy.5
In ruling on the parties’ cross-motions for summary judgment, the District Court noted that “[u]nder Washington law, an insurer may not change the basis for avoiding liability after litigation has begun,”6 and “[a]n insurer is charged with the knowledge which it would have obtained had it pursued a reasonably diligent inquiry.”7 However, the District Court ruled that the estoppel doctrine can only be invoked if there is coverage under the policy; it could not be used to create coverage when none would otherwise exist.8

The District Court also found that, under Washington law, the certificate of insurance was not binding on Selective and as a result, T-Mobile was not an insured party under the policy. Consequently, T-Mobile could not invoke the estoppel doctrine to prevent Selective from raising its coverage defense based on the fact that T-Mobile was not an insured party under the policy.

Water damage from a broken water supply line is one of the most frequent homeowner’s insurances claims. Quite often, an insurance carrier will assert there is no coverage for the resulting damage by citing to a “leakage” exclusion. In one such instance, while the policyholder was living in Ohio, the water line separated from the wall in an upstairs bathroom in his Michigan home causing a significant amount of water to flow into his home for 27 days.1 The carrier denied any coverage based on this exclusion:

1. “We” do not insure “physical loss” caused by:

* * *

h. Constant or repeated seepage or leakage of water or the presence or condensation of humidity, moisture or vapor, over a period of weeks, months or years unless such seepage or leakage of water or the presence or condensation of humidity, moisture or vapor and the resulting damage is unknown to all “insured” and is hidden within the walls or ceilings or beneath the floors or above the ceilings of a structure.

The insurance policy did not define the term “leakage” or “seepage.” The parties were unable to resolve their differences and the matter proceeded to litigation.

The trial court explained that “seepage” and “leakage” were more akin to a slow release of a small amount of water consistent with “humidity, moisture and vapor” and reasoned that weeks, months, or years were the periods of time it would take for a small discharge of water to cause damage. The appellate court agreed and likewise concluded that the commonly used meaning of “leak” refers to a gradual or low volume water event. The appellate court explained:

For the exclusion to apply, the “leakage” or “seepage” is required to be “constant” or “repeated” “over a period of weeks, months or years.” This time requirement of weeks, months, or years is necessary for a low volume gradual water “leakage” or “seepage” to cause significant damage to a home. As the trial court found, the terms of the exclusion demonstrate [the insurance carrier’s] intent to avoid coverage for losses that are caused by a homeowner’s neglect, failure to maintain, and failure to occupy a home.

The appellate court concluded that the exclusion did not apply because the amount of water that was released into the policyholder’s home would have caused significant damage within hours or days because the separated pipe essentially caused flooding.

While each case has its own distinct facts, if there are concerns about the denial of a water-related or other type of claim, policyholders should seek the advice of a competent professional.
___________1Cincinnati Ins. Co. v. Kaeding II, No. 332559, 2017 WL 3090600 (Mich. App. July 20, 2017).

A best practice is to have a Certificate of Insurance state the policy period for each policy it describes. If you need that coverage to continue beyond the stated policy period, another best practice is to follow up for a renewal certificate. Consider whether this could be added as a term in the contractual requirement for a Certificate of Insurance. For example, let’s say your company embarks on a major expansion of its facility, and the work is expected to take 18 months. Your company hires a general contractor, and your agreement with the contractor requires it to provide Certificates of Insurance regarding several types of coverage – such as commercial general liability, errors and omissions, workers compensation, and business auto – as to itself and for all subcontractors it hires. Because insurance policies often are written for one-year periods, the certificates you receive at the outset of the job might list policies with policy periods that could terminate during the course of the project.

Therefore, consider whether you could ask that the policies be maintained or renewed at least through the duration of the work and that new certificates be provided as each policy is extended or renewed. Then, a best practice would be to follow up to make sure you actually receive those certificates and review them with the same care and diligence as if the project were starting all over again.

2. Consider your options upon cancelation or expiration

Continuing with the example of your company expanding its facility, consider the unfortunate circumstance that one of the general contractor’s policies is canceled during the policy period or expires without being renewed. Depending on the terms of the contract and applicable statutory or common law, you might have a range of possible remedies. Identifying them is beyond the scope of this post. The point, however, is to consider how to address the problem, the potential for a possible gap in insurance coverage and who can help you determine next steps.

3. Keep certificates even after they’ve expired

A Certificate of Insurance might be very helpful even after the conclusion of the policy period of all the policies it describes. Take our example of the facility expansion project. Assume that a year after the job was completed, the plant manager complains that excessive heat in the building is causing equipment to break down and your company’s products to fail their standard quality control tests. General liability insurance policies often are written on an “occurrence,” rather than “claims made,” basis. Therefore, the policy in place at the time of the property damage or bodily injury often is the insurance policy that could provide coverage, even if a claim is made after the policy period. If you still have the Certificates of Insurance, you have valuable information about the insurance policies that may, among other things, become a source of recovery for the damages you allege.

4. Consider the significance of a Memorandum of Insurance

In the past, a Certificate of Insurance was typically delivered on paper or by fax. Now it’s more commonly delivered by email, usually as a PDF attachment. Recently, the Memorandum of Insurance has emerged as another electronic method of providing insurance information. Rather than a paper document or PDF attachment, a Memorandum of Insurance is typically delivered by providing a web link to the information. This can be a more efficient method of delivery if the policyholder has to provide its insurance information to many other parties at various times throughout a given policy period.

Moreover, if the policyholder’s insurance program changes from time to time, not just at an annual renewal, the memorandum can be updated almost immediately. Plus, someone with viewing access to the memorandum usually can save or print a copy. In light of this, consider whether a Memorandum of Insurance is basically the same thing as a Certificate of Insurance, just delivered in a more modern way that may be advantageous in some situations. All the other best practices above and in my previous post should be considered in the context of a memorandum as well.

After a long wait, the California Supreme Court issued its opinion in McMillin Albany, LLC v. Superior Court regarding the application and interpretation of California’s Right to Repair Act (the comprehensive statutory scheme for construction defect claims for newly built residences; also known as “SB800”; hereafter “the Act”). In its unanimous ruling, the court clarified that the Act is “the virtually exclusive remedy not just for economic loss but also for property damage [claims] arising from construction defects”. As such, the court held that the underlying litigation brought by the homeowners was subject to the Act’s prelitigation procedures, and the Court of Appeal was correct to order a stay on the litigation until the homeowners followed those procedures. In addition to having shortened statutes of limitations, the Act also gives builders the option to either inspect the property and offer repairs, or to proceed directly into litigation with the homeowner. The court held that even if a plaintiff tries to plead around the Act, the builder can still enforce the right to repair, as the Act was intended by the legislature to supplant common law causes of action like negligence and strict liability.

We wrote about this issue last year, noting that two of the six appellate districts in California had previously issued opinions in line with the Supreme Court’s (later) ruling in McMillin. Clarity from the high court was needed after uncertainty had resulted in the construction defect (“CD”) community in California after the 4th Appellate District Court issued its opinion in Liberty Mutual Ins. Co. v. Brookfield Crystal Cove LLC in 2013, holding that the pre-litigation procedures in the Act are mandatory only where the homeowners plead statutory causes of action under the Act. In Liberty Mutual, the court held that since the homeowners only brought causes of action in common law (i.e., negligence and/or strict liability), and did not include any claims under the Act, the pre-litigation procedures in the Act, including the automatic stay, did not have to be followed. We noted at the time that while the Supreme Court had not yet issued its opinion in McMillin, the two appellate rulings regarding the Act were “a source of optimism to those in favor of overturning Liberty Mutual.”

The genesis of the creation of the Act is found in Aas v. Superior Court (2000) 24 Cal.4th 627, 632 (Aas), where the California Supreme Court held that the economic loss rule bars homeowners suing in negligence for construction defects from recovering damages where there is no showing of actual property damage or personal injury. Emphasizing long-standing case law, the court in Aas explained that requiring a showing of more than mere economic loss was necessary to preserve the boundary between tort and contract theories of recovery, and to prevent tort law from expanding contractual warranties beyond what home builders had agreed to provide. The court essentially invited the California Legislature to alter the Aas limits on recovery and to add whatever additional homeowner protections it desired. Within two years, after the stakeholders in California’s CD community (homeowner and home builder construction interest groups) provided significant input, the Legislature passed the Act.

The court’s opinion in McMillin focused on the intent of the Legislature in enacting the Act and concluded that the Act was intended not to merely alter the common law (i.e. abrogating Aas by supplementing common law remedies with a statutory claim for purely economic loss), but rather to supplant the common law “with new rules governing the method of recovery in actions alleging property damage.” Where the court held that the Act is “the virtually exclusive remedy” for economic loss and property damage claims arising from construction defects, it made clear that the only areas that the Legislature intended to preserve for common law claims in a residential CD setting are breach of contract, fraud and personal injury. “For economic losses, the Legislature intended to supersede Aas and provide a statutory basis for recovery,” the court wrote, adding for personal injuries, the Legislature preserved the position and kept the common law as an avenue for recovery. “And for property damage, the Legislature replaced the common law methods of recovery with the new statutory scheme.”

The opinion provided the following concise summary of its key finding, as follows:

“[T]he legislative history confirms what the statutory text reflects: the Act

was designed as a broad reform package that would substantially change

existing law by displacing some common law claims and substituting in

their stead a statutory cause of action with a mandatory prelitigation process.”

Prior to the Supreme Court ruling in McMillin, it was typical for plaintiffs to ignore the pre-litigation notice and procedures contained in the Act, thereby depriving homebuilders of the benefits associated with that notice and procedures. With this ruling, the state court judges in California now have clarity that the Act serves as plaintiffs’ exclusive remedy for economic loss and property damage claims in the residential construction setting.

A torrent of alerts have been flooding e-mail inboxes regarding the California Supreme Court’s decision in McMillin v. Superior Court, to reverse the Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC (2013) case, but with little discussion about the practical effects of the ruling.This alert will discuss how this ruling affects litigation of SB 800 Claims and Builders.

Background on Liberty Mutual Case

In 2002, the California Legislature enacted comprehensive construction defect litigation reform referred to as the Right to Repair Act (the “Act”). Among other things, the Act establishes standards for residential dwellings, and creates a prelitigation process that allows builders an opportunity to cure the construction defects before being sued. Since its enactment, however, the Act’s application has been up for debate. Most notably, in Liberty Mutual Insurance Company v. Brookfield Crystal Cove LLC (2013), the California Court of Appeal for the Fourth District held the Act was the exclusive remedy only in instances where the defects caused only economic loss, and that homeowners could pursue other remedies in situations where the defects caused actual property damage or personal injuries.

Liberty Mutual remained the law of the land until the Fifth District issued a contrary ruling in McMillin Albany LLC v. The Superior Court of Kern County. In McMillin, the homeowners sued the builders for negligence, strict product liability, breach of contract, breach of warranty, and violations of the Act. In turn, the builders asked the homeowners to stay the litigation so that the parties could proceed with the Act’s prelitigation requirements – that is, so that the builders could have an opportunity to cure the defects. The homeowners did not agree to the stay, and instead withdrew their claim under the Act. The builders subsequently moved to stay the action, which the trial court denied based on Liberty Mutual. The builders appealed. The Fifth District sided with the builders, holding the Act’s prelitigation progress applied even though the homeowners had dismissed their statutory claim under the Act. The California Supreme Court subsequently granted review to resolve the District split between Liberty Mutual and McMillin.

The California Supreme Court Decision

The California Supreme Court recently held, after a lengthy discussion on legislative intent, that the Act is the virtually exclusive remedy not just for economic loss but also for property damage arising from construction defects. In doing so, the Court made three critical findings: 1) the prelitigation requirements apply to “any action” seeking damages for construction defect, not just those brought under the Act; 2) a homeowner who suffers only economic loss may present a claim under the Act without waiting for the defect to cause actual property damage; and 3) the Act preserves common law tort claims for construction defects resulting in personal injury. In light of these findings, the Court ruled that even though the homeowners had withdrawn their claim under the Act, they were nonetheless required to initiate the prelitigation procedures because their alleged damages arose from construction defects of the residential homes.

How Does the Ruling Affect Builders – and their Lawyers?

This decision should speed up litigation and reduce attorneys’ fees for Builders. As attorneys for Builders can appreciate, complaints that contain common law causes of action are a major distraction; we are forced to spend time evaluating theories of liability that Liberty Mutual said were not pre-empted by SB 800. This additional work increased the cost of the litigation for Builders and their insurers, which obviously the Plaintiffs’ attorneys liked because it increased settlement leverage. Now, McMillin returns the legal landscape back to where it should have been, restoring more order to the legal process.

So now that Plaintiffs’ lawyers are relegated to litigating under SB 800, the Builders should hold the Plaintiffs’ lawyers feet to fire in the Prelitigation Procedure and demand a dismissal of prematurely filed claims. Plus, Builders need to look at instituting the Right to Repair on a case-by-case basis. If there is a claim involving a small number of homes, it may make sense to perform repairs, whereas repairs in large cases with dozens of homes may not make sense. Before performing repairs, Builders should check to see if the repairs count against a self-insured retention, since frequently they are not.

McMillin is a win for builders of residential homes because it returns clarity to the legal process and eliminates disputes about common law theories of liabilities. This should ease some of the fees associated with these cases and speed them up towards a resolution. And just as importantly, it decreases Plaintiffs’ settlement leverage, which is always a good thing.

This document is intended to provide you with information about construction law related developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.

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